Boston College, Carroll School of Management

Potential Plans for Apple’s Cash

The largest lottery winner in US history was in 2016 for $1.6B. You would need to win over 150x to have the same amount of cash (or cash equivalent) that Apple has on its books.

Apple recently announced that it will be bringing back the majority of its $252B that it has been hoarding overseas, and has plans to invest in the US. This is really huge news and comes in response to the new US Tax code being set at a much friendlier rate of only about 15%. However, I do not believe that Apple is going to simply sit on its fat stacks of cash, but has plans to make a big acquisition.

“Apple’s cash alone would be the 13th most valuable company in the S&P 500. Apple could buy every single team in the four major professional sports leagues in the US, and would still have almost $100 billion left.”

It has been almost 4 years now since Apple has made a splash with an M&A deal of over $1B, when they acquired Beats Electronics for $3B. This however does not mean that Apple has not been acquiring companies. In fact, Apple has made several smaller acquisitions (most are kept quiet) which I will touch on later. Many analysts say that with the massive amount of cash they are bringing back, it is too much to simply accelerate buy backs of shares, and they are a prime target for a large M&A move. Expectations are tempered, however, because Apple is not known (like Amazon) to make huge acquisitions of expensive existing companies.

“iPhone sales accounted for two-thirds of the company’s revenue last quarter”

In this blog post I will lay out several possible scenarios of moves that Apple could make, ranging from probable (according to Wall Street analysts) to more outside shots (still with interesting plus sides).

Scenario 1: Apple acquires Netflix (Approx. $110B)

Netflix has posted impressive growth in subscribers and continues to produce new original content making the platform very sticky for users. The company has signed up more than half of all U.S. broadband households and is building its customer base in 190 countries by spending billions on programming. Although subscribers in the US are about saturated, the international expansion has been huge for Netflix. Despite a price increase, they actually increased the amount of users on their platform. However, they are currently in fierce competition with Hulu, Amazon, and Disney, who announced that they will be pulling their content off the platform by 2019. Netflix is focused on growth, which is one reason why cash flow is expected to be between -$3 to -$4B for 2018.

The case for why Apple would benefit by owning Netflix is that although it has a great reputation in music, it has struggled in film and television. Apple has failed to keep up with competitors like Amazon, and Netflix is also being pushed by them. They have also not come out with a groundbreaking product in some time, and iPhone sales are declining. Also, Apple TV has not been the success story that Tim Cook had hoped it would be. All of these factors lead me to believe that Apple needs to make a move to stay competitive. Apple has the pocketbook to fund the expansion of Netflix and a platform to extend its usage. To spend $10-20B on content would hardly dent the excess capital Apple has stored. The obvious caveat is that Netflix has not been extremely profitable in the past, and this is a massive deal that could disrupt either companies core business.

Scenario 2: Apple buys Tesla (Approx. $60B)

Tesla is a slightly less traditional direction for Apple, but I think is the most exciting in terms of upside. Some people would say that since Steve Jobs death in 2011, Apple has been very lacking in groundbreaking innovation. With acquiring Tesla, this would change. Apple, along with Google (Waymo), GM, Ford, BMW and just about everyone else are in a race to perfect and bring to market the self-driving car. Tesla, the initial leader, has run into problems in execution and funding their expansion. Apple would be able to combine its existing self-driving car team with Tesla’s and fund expansion of production. Hopefully this team would be able to jump the competition and dominate the market, focusing on clean energy cars. Tesla wouldn’t have to worry where its next capital injection was coming from (and it needs them, with -$4.8B in free cash flow in 2017), because Apple would be able to fund the losses easily.

“22% of Americans said they would most like Apple to develop a car in the next 5 years”

This could also be interesting on the innovation side of things. Elon Musk is more than just a CEO, but is one of the biggest thinkers of our time. I think that Musk teaming up with Cook at Apple could create an interesting space for exploring big ideas. Apple has always been someone who is willing to take risks, and the automobile industry would be a large risk for them. Apple needs a new product with competition in phones/computers/tablets increasing and margins shrinking.

Scenario 3: Apple buys Disney (Approx. $170B)

This story would play out similar to the Netflix one. Apple cannot compete organically in the content creation, so they could acquire someone who already has a large footprint in the space. Pixar, Marvel, ESPN, as well as other content would immediately make Apple a competitor with Netflix and Amazon. However, I see this deal as a little ambitious, as the size of it makes it a longshot. The largest M&A deal was for $106B when AT&T acquired Time Warner in 2016. However, Disney and Apple have a good longstanding business relationship. Bob Iger at Disney worked closely with former CEO Steve Jobs when they were both at Pixar. Iger was given Jobs’ spot on the Apple board of directors as well.

Scenario 4: Apple continues to expand in the VR/AR Space with small acquisitions

Yes, that’s right. Apple has been very under the radar about its acquisition of VR related companies. Because this technology is so new, they can buy these companies for relativley small amounts of money. Apple has already acquired 5 companies in the VR space (Flyby Media, Emotient, Turi, Tuplejump, and Indoor.io) in 2016 alone, and they continue to expand. Google and Microsoft have their own VR headsets on the market, but in classic apple fashion, they will not be the first to market. I believe that continuing to acquire companies in this sector and improving their VR/AR tech will let Apple do exactly what the iPhone was for cell phones.

“Apple doesn’t have a VR headset on the market (yet), but competitors like Google Cardboard and Microsoft Hololens have failed to bring VR to the mainstream”

A company that I would target for acquisition by apple in this space is Zappar, which allows customers to unlock hidden VR content behind physical objects. This technology is often used as a marketing strategy to drive customers to interact with the brand. They could receive points or unlock deals for an incentive. WaveOptics could be another target, as they have a google glass-like product that has applications in health and fitness training. To Apple, these companies are pocket change, so I don’t see them stopping acquiring anytime soon.

Conclusion:

I hope the scenarios I laid out were pretty interesting to consider. However, it is important to know that when the WSJ talks about $252B in cash, not the entire thing is sitting in hundred-dollar bills. Most of the amount is invested in either short or long term marketable securities, which would need to be sold in order to make an M&A move.

If I could see one of these deals happening, I think it would be Tesla. I believe that Apple has never been one to get into creating content, and although Amazon has been successful in it, I don’t see Apple following suit by acquiring Netflix or Disney. I also think this would have interesting anti-trust applications, as many people are starting to think that tech giants are bullying their way around and have too much influence.

Let me know what you think about these deals or any other moves you could see Apple making, and take the pole on Twitter!

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11 thoughts on “Potential Plans for Apple’s Cash”

I always knew that Apple’s assets were staggering, but I had no idea that it was on this level. To even be in the conversation of acquiring Disney (along with all of its subsidiaries) is pretty unbelievable. I definitely agree with you that Tesla would be the best option, though, as it aligns most with their technological expertise. It is also the most clear in how Apple can help, as opposed to Netflix or Disney where the dynamic of their partnership is somewhat ambiguous. Nevertheless, it’s clear that Apple has no plans of slowing down.

Hi John, nice post! It is crazy putting Apple’s wealth into perspective like you did at the beginning of the post, and really interesting speculating about possible acquisitions and their implications! I think the most likely scenario you addressed would be that Apple further expands into the VR/AR space. I see much of technology and wearable tech moving in that direction, so it would align with Apple’s intentions as a company. Though I am not sure how likely it will be, I personally think acquiring Netflix could be a great move for Apple, as it would reintroduce them as a successful competitor in the Television and Film space after the relative failure of Apple TV.

Great post! The size of Apple’s balance sheet simply astounds me. What’s interesting is that they’re able to make under-the-rader acquisitions without reporting to them public because the acquisitions are simply not material to their massive balance sheet. If the Tesla deal happens, it may be one of the biggest strategic moves Apple has done since its acquisition of NeXT!

Hi John, awesome post and very interesting! I loved the way you broke each option down and contemplated the possibilities. The first picture you used that broke down Apple’s “cash pile” was very powerful. I think that Apple would go more into the VR/AR space more so than Tesla because Apple has such a strong culture/company values that I think it would clash with Tesla’s culture (which I’ve heard is also strong). Also, you were spot on when you mentioned the improbability of Apple working with Netflix or Disney because Apple isn’t great at content creation. I really enjoyed reading your post!

“Apple could buy every team from the four major sports and have 100 billion left”-absolutely mind boggling. I’m not sure which would make more sense for Apple. With Netflix, they could potentially streamline a lot of their services and bolster Netflix’s offerings with their extensive rights to movies- a problem that Netflix has had. However, I believe that Tesla with the nail on the head with two major technological innovations- electric cars and self-driving cars. If I had to make the decision, I would have to agree with you with the acquisition of Tesla. Nice post, John!

Great post John. Really well done. Their growth and success since the mid-90’s is just staggering. And how their stock has appreciated is just as impressive. We didn’t really have time to break down all of these metrics in class, so your post is a great follow-up. Thank you!

John, awesome work! I love your infographic about what companies Apple could buy with its $250 billion. If Apple can successfully develop self-driving cars, Uber could be an interesting move if all goes well with their IPO. Just some food for thought! I also agree with Katie that it is almost guaranteed that Apple will make a big move in AR/VR. Should be interesting to follow their moves in the coming months!

John,
I love this quote — “Apple could buy every single team in the four major professional sports leagues in the US, and would still have almost $100 billion left.” It’s a great way to grasp the wealth that Apple has. Unbelievable. I think a big M&A move is on the horizon for the company as well. I loved reading about the possible scenarios that you came up with. It’s also interesting to read about the smaller acquisitions they have quietly been making in the VR/AR space. I’m excited to see what happens. They’ve got some solid options!
Kelsey

Nice post. I’ve been hearing speculation about what Apple is going to do with its cash for about a decade. So far, they haven’t done much. Maybe they’re saving it for a rainy day when they feel like their competitive advantage is threatened. I’d bet for the VR/AR space, since that’s a market that’s close but really needs a dominant player and it’s not as big of a purchase as the others.

I agree with Prof. Kane here. Though Facebook’s purchase of Oculus left them the defacto ‘dominant’ player in the VR place, it doesn’t quite seem to align with Facebook’s vision to ‘connect the world’ since it seems primary early adopters are likely to be immersive escapists (re: do people who love watching movies, getting immersed in those worlds want to connect with others while they immerse?). Apple is already the leader of the world with their ARKit, which provides real-world immersion, and an introduction of VR in their product portfolio might be the bounce they need to increase interactions with Apple in the home! I’m interested to see where this money goes any way you slice it.